These days, instead of getting asked about how to win bidding wars, my clients and friends constantly ask me if we’re in a real estate bubble that’s ready to pop. That’s why I decided to write this article explaining what a real estate bubble is, if we’re in one now, and most importantly, if or when I think the bubble might pop. 

I’ll wrap up by providing some key resources I used to survive and thrive through the recession of 2008. 

Free Template: Housing Market Infographic

What Is a Housing Bubble, Anyway?

A housing bubble, or speculative bubble, is defined by a steep rise in housing prices that is not supported by common or logical economic factors or fundamentals. The first recorded speculative bubble occurred in the 17th century in Holland and is now known as Tulip Mania, a period during which prices for some newly introduced and fashionable tulip bulbs climbed precipitously and then collapsed dramatically. More on this later.

2022 Market Factors Indicative of a Coming Housing Bubble Pop

Ask a real estate CEO or economist and they’ll tell you that there are many factors contributing to the current and massive housing appreciation throughout the U.S. Factors such as the sudden growth in remote work, changing migration patterns, and supply shortages are contributing to an already under-supplied housing inventory.

Increased demand and low inventory is causing regular homeowners, like you and me, to have to bid 10% to 20% over asking price to secure a deal on a home. These basic economic forces have caused home prices to rise in some areas by more than 40% in just the past year!

While these factors are indeed important, there are other factors behind the scenes that may be causing even bigger problems for the American housing market. 

Institutional Investors Are Changing the Market

Real estate speculation is at an all-time high. However, unlike in 2008, this time it’s not from unqualified buyers who are buying property with subprime mortgages. Instead, massive institutional investors are buying single-family homes by the tens of thousands. 

Looking to cash in on the high rents and a housing shortage that likely will take 20 to 30 years to resolve itself, these firms have raised BILLIONS (yes, with a B!) of dollars and are often using those funds to pay market price or above to buy homes throughout the United States.

It gets worse. With limited existing home inventory, some institutional investors are hiring homebuilders like Lannar to build entire neighborhoods to turn into investment rental properties.

This practice will put further strain on the already short-handed new home industry and prevent more new homes from being built for individual homeowners. 

The primary concern with institutional investors is that not only are they buying housing that is further diluting housing inventory, causing inflation, and increasing rents, but when we do have an economic downturn that impacts housing values and rental income (and we inevitably will), will those investors hold the homes and developments or dump them like a truckload of bad fish?

If that happens, we could see a few hundred thousand homes hit the market in a short period of time and the housing market will have officially burst, possibly to a greater degree than we experienced in The Great Recession that began in 2007. However, I suspect that those running these institutions are smart and have planned for a future market correction.

So, Are We in for a Housing Bubble in 2022? When Will It Pop?

With low inventory and pent-up buyer demand, we are not likely in a catastrophic housing bubble in 2022… yet. However, it is still possible for values to slow and the market to correct without causing a total housing market collapse. 

The main factor that could change the trajectory of housing appreciation is interest rates. With inflation still on the rise, the government has announced it will raise interest rates throughout 2022. This is highly likely to have an impact on rapid housing appreciation but not enough to make home values fall.

As we know from history, war can also slow the economy. With Russia’s invasion into Ukraine, even the threat of a U.S. war with Russia could negatively impact the rising housing market.

Overall, I agree with what Gary Keller, founder of Keller Williams, recently announced at his annual conference, “We’re not in a bubble, but we may be blowing one!”

5 Ways Realtors Can Prepare for a Potential Housing Bubble Pop

Just because I don’t think we’re in a bubble ready to burst doesn’t mean you shouldn’t be prepared for one. World events like the war in Ukraine, rising gas prices, and inflation might put a damper on the confidence and qualifications of buyers. 

In 2007, the market had more buyers than listings. Builders were selling homes by lottery, and real estate agents were living large—and so was I. Like many others, I owned multiple properties and I was building custom homes on the side for big profits.

As agents, we knew that 100%, no-document lending was wrong, but we didn’t know the consequences. One year later, in September 2008 when Lehman Brothers—the nation’s fourth-largest investment bank—filed for Chapter 11 bankruptcy, it signaled the start of the largest real estate crash of our lifetime.

It was like someone turned off Niagara Falls. One minute you are selling 10 homes a month, the next you have 20 listings and no buyers. The clients you just sold homes to start calling and saying that they could no longer afford their payments and had to sell—ASAP. Short sales and foreclosures quickly became the norm.

I was fortunate. Unlike the million-plus real estate licensees that left the business, I pivoted to working with distressed homeowners and became a Real Estate Owned (REO) agent. An REO agent represents banks and loan servicing companies to sell the homes that they foreclosed upon. 

If you want to get ahead of any possible market shift, you can learn more about how I not only survived the recession, but how I thrived in a shifting real estate market in this course offered in The Close Pro.

Visit The Close Pro

In the meantime, here are a few more resources to help you prepare for a shifting market: 

1. Diversify Your Lead Generation Strategies

As a rule, generating leads is going to be harder. That means you might have to change how you get leads.

2. Follow Industry Thought Leaders

Of course, watching and learning from industry thought leaders or top producers in your city can be helpful too. Chances are they have weathered recessions before, so look to see what they’re doing and how they change it up in response to the market.

3. Try Working With Investors

Contrary to popular belief, investors generally increase their buying activity when prices soften. If you want to get ahead of the game, learning how to work with investors can help.

4. Conquer Your Fear of Cold Calling

The days of business just falling in your lap might be coming to an end. The agents who thrive will be the agents who are fearless and relentless cold callers. Learn some tricks to get ready.

5. Keep Yourself Motivated

If you’re down in the dumps all the time, it’s going to be very hard to attract much new business. Learn how top agents bounce back, and copy their strategies so you stay fresh and confident no matter what happens in the market.

Market Bubble History: What Houses & Tulips Have in Common

In the mid-1600s, tulips were imported from the Turkish Empire to Europe for the first time. They were so delicate and rare that the people of Holland saw them as a sign of great wealth and prestige. This made the already scarce but very fashionable tulip bulbs quickly rise in price.

The desire for this status symbol quickly spread throughout Europe. With millions of new buyers, a shortage of bulbs arose as growers could not keep up with demand. With limited supply and high demand, tulip sellers raised prices, then raised them again and again. The more the prices rose, the more the Dutch believed tulips were a wise investment. Sound familiar?

Eventually, the demand was so great that the Dutch set up a futures market to allow investors to buy and sell bulb contracts on end of season bulbs. The frenzy continued with premium tulip bulbs selling for over 5,000 florins, or $150,000 in today’s dollars!

That is, of course, until the bubonic plague reached Holland and kept bulb traders away from the crowded bulb auctions. Lack of trading caused prices to rapidly fall. Wanting to cash out, contract holders began to sell.

Tulip contracts then flooded the market and the more that were available, the lower the prices fell until values were below their previous “non-bubble” market value.

Citizens of Holland lost millions of dollars, leaving some in complete financial ruin. While Tulip Mania is the most famous bubble story, there’s a lesser-known bubble story you may not have heard of.

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Lincoln’s National Debt: America’s First Real Estate Bubble

The first recorded real estate bubble in the newly formed United States was just after the Revolutionary War. The war caused some serious damage to the existing housing supply. After the war, much of the nation’s focus fell on rebuilding the infrastructure, but not rebuilding the housing supply.

By the early 1800s, life began to normalize and young families desired a home of their own. This caused housing values to rise quickly and helped spark the movement to homestead the west.

At this time, Abraham Lincoln was a young man living in Springfield, Illinois, and working as a land surveyor. Lincoln had inside knowledge that the railroad was planning to build tracks through his small town.

Believing that a railway would bring tourism and a bustling economy to his sleepy town, he borrowed money to buy the properties that would be directly across from the train station.

Lincoln wasn’t alone in his desire to get rich quickly from real estate. Property speculation was rampant across the country. Unregulated by the federal government, banks allowed for easy financing for properties and land. Real estate values skyrocketed as more and more people saw the opportunity to build wealth by speculating on real estate.

That is, until 1837. In an effort to prevent the banking system from collapsing, the federal government refused to allow banks to accept anything other than gold or silver for land purchases. This caused The Second Bank of the United States to foreclose on heavily mortgaged lands and farms. Does this sound familiar? A little like Lehman Brothers in 2007, right?

Values then began to rapidly fall as speculators sold off their lands before banks foreclosed on them—some for literally pennies! This caused “The Panic of 1837.” This recession put a temporary halt to western railway expansion and the tracks never came to Springfield. Lincoln’s dreams of being a wealthy real estate investor crumbled.

To make matters worse, when Lincoln couldn’t pay his debts, the properties were repossessed along with his survey equipment, cart, and donkey! Young Lincoln was left to repay his debt for the remainder of his life. As President, he would jokingly refer to it as the “National Debt.”

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Past Housing Bubbles & Why They Popped

Like the tulip bubble, when housing bubbles burst it may not be just due to the buyers running out of money or getting scared out of the market, as you would think. Bubbles can burst due to unrelated events, like a plague or war.

Real estate bubbles were commonplace in the U.S. during the expansion to the west from 1821 through 1857. Land speculation was fueled by unregulated banking, agriculture (mainly cotton), and the Gold Rush, until this pattern was interrupted by the Civil War in 1861.

Large real estate speculation bubbles likely couldn’t occur for nearly 150 years due to four major wars and two depressions, leaving the U.S. economy and housing prices to mildly fluctuate with smaller booms and busts. Of the 50+ recessions and depressions that the country had seen, only three were caused by actual real estate bubbles.

Until 2008, when the country was on the tail end of an unprecedented 20-year economic boom that coincided with the introduction of subprime mortgages, creating a perfect environment for real estate speculation—and a massive housing bubble so large that when it burst, it disrupted the entire world’s economy.

The important point here is that while real estate bubbles are not a new occurrence, they are not very common, either. With the massive appreciation of the past two years, it feels like we may be in one now.

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Over to You

Do you think your local market is approaching bubble territory and is ready to pop? Let us know your thoughts in the comments.

The post Warning: Housing Bubbles Tend to Burst. Here’s How Agents Can Prepare appeared first on The Close.

Building the skills you’ll need to regularly pinpoint undervalued, off-market properties, advise investors, and close sometimes tricky deals won’t be easy. However, if you have a passion for investing, a solid work ethic, and a thick skin, you can easily close 50 to 100 deals a year working with investors—regardless of the market. I’ll walk you through the nine skills you’ll need to hone to start working with investors in 2022.

1. Be an Expert in Your Market

When it comes to attracting real estate investors, you need to know a lot more than just days on market and year-over-year appreciation in the area. You must become a bona fide expert in your local market and sub-markets.

Before you drill down into your local market, you need to understand the 30,000-foot view of the industry. Start by reviewing your local housing statistics and economic policy news to stay up to date so you can better inform your clients of what’s going on.

You should also know about upcoming development projects, zoning ordinance changes, and amenities and attractions in the area. Familiarize yourself with the area’s major employers, local schools, newest shopping and dining areas, and public transportation options.

Sub-markets are smaller areas within your local market that can include the next neighborhood that is likely to pop for investors by researching the neighborhoods in your market that allow short-term rentals and have the highest rent-to-value ratio.

2. Know a Good Deal When You See One

In addition to local market knowledge, real estate investors want an agent who knows a deal when they see one. Nothing is more frustrating to a real estate investor than an agent who sends them a deal or property that doesn’t make any sense. It’s a waste of their time and yours—and a sure way to get yourself blacklisted from any investor’s list of preferred agents.

So, before sending potential opportunities to an investor, take the time to do some basic research on the property. For example, an experienced buy-and-hold investor will expect you to estimate the cash flow and cash-on-cash return of the deal before presenting it to them.

To do this successfully, you will need a deeper understanding of the three basic types of real estate investing and how to evaluate deals in each category: buy and hold, fix and flip, and speculation. If you want to get started learning how to evaluate deals, check out my articles on analyzing cash flow properties and fix-and-flip properties below:

3. Learn How to Be a Trusted Adviser

If you are going to become the “go-to” agent for investors, then you need to give them guidance and be prepared to help them avoid common mistakes. There are three common mistakes investors make, especially when they are new.

Overpaying for Properties

Real estate investing is exciting and it is easy for investors to allow their enthusiasm or competitiveness to outweigh their logic. This is especially true when they are competing for a deal in a multiple offer situation. In my 27-year career, I have seen multiple investors overpay for properties just so they can say they WON!

There is a saying in real estate investing, “The money is made when a property is bought—not when it is sold!” This is because it is easy to make money when a property is purchased undervalue, but it is nearly impossible to turn a bad purchase into a good investment.

You can help your investors to not get swept up in the excitement by teaching them to set their maximum offer price prior to making an offer and getting into a bidding war.

Underestimating the Repairs

By nature, most investors have a strong self-confidence. They probably wouldn’t be investors if they didn’t. However, their confidence can cause them to overlook details, and underestimate the cost of repairs and the time it will take to complete the job.

You can guide an investor to avoid the mistake of underestimating their efforts and resources by using my Fix & Flip Property Evaluation Process. It was specifically designed to help you and your investor review a property without missing any detail.

Overpricing the Property

Many novice investors have a tendency to want to raise the after-repair value (ARV) after they close on the property or as they are making repairs. When they do this, they can price the home outside the market—and we know an overpriced property loses the initial interest of buyers and can easily become stale on the market. Then after a few weeks, price adjustments are made and eventually an offer is received that is far below what the property would have sold for had it been priced correctly initially.

We know better. Don’t make this mistake, and help your investors by accurately estimating the ARV and advise them to stick to it.

The next thing you need to do to get started attracting investors is to learn how to find undervalued off-market opportunities. Good thing we’re covering that next.

4. Know How to Find Undervalued, Off-market Properties

Experienced real estate investors are looking to buy properties that are below market and want an agent who can find them undervalued deals that aren’t already on the MLS or Zillow.

Let’s be honest here—even if there is a property on the MLS that is 20% below market, if the listing agent is doing their job correctly, they will collect multiple offers and drive the price right back up to, or beyond, the fair market value.

So the secret to finding undervalued properties for your investors is to learn how to search for off-market properties like preforeclosures, bankruptcy, and estate and vacant homes.

If you want to get started learning today, check out my article on my nine proven strategies to find hidden listing inventory: 9 Proven Strategies to Find Hidden Listing Inventory.

Once you find your investor an off-market property, it will be time to get your hands dirty.

5. Be Willing to Get Your Hands Dirty

Real estate investing is definitely not for the squeamish. You have to be willing to (sometimes literally) get your hands dirty. Ask any investor and they will tell you the same thing; “Trash Is Cash!”

Real estate investors take dirty and rundown properties that nobody else wants, and turn them into sparkling gems and make big profits doing it! So needless to say, when working with most real estate investors, you’re going to need to get a little dirty.

You may need to preview hoarder houses and even properties with mold and fire damage, and at times you may find yourself on your hands and knees in a spider web infested crawlspace checking for lead pipes or looking for the cause of the sagging kitchen floor. Ask me how I know …

So, if you’re serious about working with investors, keep the Louis Vuitton’s at home and break out the Timberlands. It can be dirty work.

6. Be a Referral Resource

More than any other type of client, real estate investors need their agent to be a resource for everything from Hard Money Lenders to plumbers.

Over the years, I have worked with real estate investors from just a few blocks away to as far away as China. Unlike 20 years ago, today investors who need your services will come from all over the country and maybe the world. They will all need your contacts and resources in order to find properties, get them ready to rent or sell, and maintain them.

Get started by creating your list of your preferred contractors, attorneys, accountants, and so on, and be ready to share it with them. They will be happy to get your referrals.

7. Learn to Negotiate Like a Boss

A real estate agent should have strong negotiating skills regardless of what types of clients they work with, but it’s especially important with investors. An investor isn’t going to live in the property; it’s strictly a business and a source of income, so they want to get the best possible deal.

You should be able to assist in getting the best possible deal on buying a property or selling a property for the highest price in the fastest amount of time. Make sure you aren’t too shy to push through tough negotiations. You may need to send multiple offers on different properties—some may be “low-ball” offers and you have to be OK with that. It takes a thick skin to work with real estate investors.

8. Invest in Real Estate Yourself (or Be Willing To)

As a real estate investor and agent, I often notice that the agents who don’t understand what a good deal is are also the same agents who don’t invest themselves. That’s because it’s easy to tell someone else to put their time and money into a deal when you’ve never risked any of your own money before!

Early into my career, I was working with an investor couple, and I had found them a new home neighborhood where they could buy a home for $150,000 and rent it for $1,500 a month (a no-brainer buy-and-hold deal).

I told them that this was a great opportunity and they shouldn’t pass it up. They replied, “If it’s such a good deal, why don’t you buy one too?” I thought for a minute and replied, “You’re right. I will!” and I purchased the home directly across the street from them.

If you are serious about working with investors, you must be willing to put your money where your mouth is and invest in real estate too. If you don’t have the credit or cash to buy a property yourself, you can offer to contribute your commission to the deal in exchange for a percentage of ownership.

9. Learn to Speak Like a Real Estate Investor

An experienced real estate investor is looking for a knowledgeable agent with whom they can share investment strategies, and they will quickly dismiss any agent if they can’t speak like an investor.

If a question like “What’s the IRR?” gives you pause, it may be time to freshen up on your investor vocabulary. If this is the case for you, then sharpen your skills by reading up on your investing terms.

Bottom Line

Real estate investors can be an outstanding clientele for any real estate agent, but many real estate investors get turned off by agents who don’t know anything about investing.

Therefore, if you truly want to grow your sales with investors, you must “invest” in yourself by learning more about real estate investing.

The post 9 Skills Agents Need to Work With Investors & Close 50-100 Deals a Year appeared first on The Close.

In this article, I’ll walk you through step-by-step instructions to use the BRRRR method to maximize profits for investors.

My Qualifications

Although I am not a financial adviser, I have built and manage a sizable, profitable investment portfolio across the Southeastern United States, with expertise in benchmark markets. However, please remember that every real estate investment comes with risk, and these are just my opinions on BRRRR. You can learn more about my qualifications on LinkedIn.

What Is the BRRRR Method?

“BRRRR” is the acronym for “Buy, Repair, Rent, Refinance, and Repeat.” The BRRRR method allows investors to build equity after purchasing, renovating, and then cash-out refinancing a property. This process can then be repeated, building significant equity and a large investment portfolio.

Why the BRRRR Method Is an Excellent Investment Strategy

BRRRR investing enables you to build a portfolio without committing significant amounts of money over an extended period. For example, if you wanted to buy five rental homes in the past, you would have required a down payment and a long-term mortgage on each. Using this technique, you can still build a portfolio of five rental properties, but it will cost you much less money than a conventional investment.

Because this approach makes use of a cash-out refinancing after the property has been renovated and leased, you may use the proceeds to reinvest in another property while still enjoying the advantages of a long-term mortgage with little to no money spent. In addition, since you own rental property, you may now take advantage of several tax breaks.

The BRRRR method, if done correctly, can grow your net worth, generate passive income via rental revenue, and eventually lead to financial independence by enabling you to own rental real estate in a unique and continuous way.

In my opinion, the benefits of the BRRRR method outweigh the risks. Here are some of the benefits of using the BRRRR strategy to invest in real estate:

1. Return on Investment Potential

2. BRRRR Allows Investors to Build Equity

3. Renovated Properties Attract More Qualified Renters

4. It Allows Investors to Build Equity & Scale Their Portfolios Quickly

How to Use the BRRRR Method to Build Passive Income in Real Estate

Let’s take a closer look at each stage of the BRRRR method for individuals looking to develop a large investment real estate portfolio.

1. Purchase an Undervalued Property

Searching for discounted homes is a vital stage in any smart investment, but it’s particularly crucial when using the BRRRR approach. Here’s why:

First, since these properties are undervalued, you may increase their worth with low-cost improvements. The more you can increase the home’s value, the more equity you’ll have to pay out at step 4: the cash-out refinancing. Second, you look for discounted homes since, unless you have a lot of cash on hand, you’ll need a hard money loan to fund this purchase.

What Is a Hard Money Loan?

A hard money loan is obtained from a private, non-bank lender, and the application procedure differs significantly from that of a bank loan. When you apply for a loan from a bank, your creditworthiness will be the most important element in their choice; with a hard money loan, the property serves as security.

That implies the bank will only consider the property’s investment worth. You’ll receive your loan if it’s a solid investment. As a result, you’ll have to create a compelling argument for yourself.

The interest rate on a hard money loan may be as high as 15%, with a range of 7.5% to 15%. These loans also have a lower loan-to-value (LTV) ratio and a shorter payback period than traditional loans—typically one to three years.

How to Choose a Hard Money Lender

Hard money loans are short-term loans that are used mainly by BRRRR investors and home flippers. In fact, BRRRR’s first two stages are almost identical to the house-flipper formula, without the “flip.” With that in mind, adopting the Rule of 70%, a house-flipping standard, is a smart method to ensure you’re looking at a decent investment.

The Rule of 70%

You shouldn’t spend more than 70% of a property’s after-repair value (ARV), minus repair expenses, according to the Rule of 70%. In practical terms, this implies that if you’re looking at a $400,000 investment property that requires $80,000 in renovations, you shouldn’t spend more than $200,000 for it.

Although this isn’t a hard and fast rule, it does make financial sense. In the example above, after spending $80,000 on repairs, you’ll still have $120,000 in the bank to cover cost overruns, market changes, and other unexpected issues.

What to Look for in a Potential Property

Because renting out the home is the ultimate goal, you should assess the property as a rental throughout the initial purchasing phase. According to the BRRRR approach, a property in a strong, active rental market is preferable to one that is somewhat undervalued but less appealing to renters.

Consider a condo or apartment near a university, which will always be in demand, vs a suburban home in a cul-de-sac, which may have greater raw value but is in a market that is more oriented toward buyers.

When looking at homes, look at vacancy rates and thoroughly check your renters. When making estimates, don’t forget to include property management costs, which often amount to about 10% of rentals collected.

2. Renovate the Property

The next step in the BRRR method is to renovate the home to make it attractive to tenants. You’ll have a decent sense of how much you can afford to spend on repairs after you’ve purchased your home, as well as what particular repairs you’ll need. Once you do, you’ll have three problems to solve:

Finding a Trustworthy Contractor

First, you’ll need to locate a contractor who can properly do the repairs while staying within your budget. That may be more difficult than it seems. You’ll have discovered contractors you can trust by the time you’re rehabilitating your fourth, fifth, or tenth property. However, it may be difficult at first.

The best way to find trustworthy contractors is to ask other investors. If you don’t know any personally, start networking on real estate investing forums like Bigger Pockets. If you’re an agent, talk to your managing broker, or reach out to your association.

Staying on Schedule & on Budget

Second, owning a home costs money every day. Utilities, property taxes, and even loan payments are included in these carrying expenses. Even if your repairs are within budget, if they take longer than expected, you may incur additional costs.

Deciding Which Renovations Will Have the Best ROI

While there have been studies that show which renovations have the best return on investment (ROI) for resale, remember that your renovations will also need to attract tenants. That might mean installing a washer and dryer, improving parking access, or other renovations that otherwise might be left to a new buyer’s personal preference.

To learn what tenants in your area want out of a rental property, research amenities on rental websites like Craigslist, Zillow, or Apartments.com. For example, in college towns, you might find that properties with multiple smaller bedrooms will rent for more than properties with a primary suite.

3. Rent Out the Property

This is the moment at which you would sell your home if you were a house flipper. However, now that you’ve used the BRRRR method, it’s time to convert your property into a cash-generating asset by finding tenants and renting it out.

You will have to move relatively quickly here because, at this point, your expenses will likely be chewing a hole in your wallet. Hiring a real estate agent or property management company to rent your property generally offers a decent ROI for most investors.

Just make sure to choose an agent or property manager who takes marketing seriously—for example, spending $100 or so on professional listing photos can get more people through the door and might get you higher rents and better tenants.

4. Refinance the Property

This is when the BRRRR method proves its worth. You may do a cash-out refinancing after your property has been refurbished and leased, which essentially turns the equity in your house into cash.

Cash-out refinances may help you save money, but they also offer a number of additional benefits. A cash-out refinancing will have a lower interest rate than a home equity loan or a home equity line of credit (HELOC), let alone another hard money loan. You may also deduct interest from your taxes.

If you want to build a real estate investment portfolio, you may choose to pay off your original loan and use the funds for the next stage in the BRRRR method with cash-out refinancing.

5. Do It All Over Again

The money from the previous stage would be ideal for a down payment on a new home. This time, you’ll have more expertise, a growing network of contractors, and a cash-generating rental property under your belt. You might even use the BRRRR method to create a large rental portfolio. With careful preparation, the sky’s the limit.

However, it’s not simple; if it were, everyone would own many rental homes. BRRRR requires meticulous study and preparation. The first step, the purchase, is much more important than the others. But if you get it correctly, the rest of the jigsaw will fit together nicely.

Finally, the BRRRR technique is the only real estate investing plan that can take you from no money down on your first investment to a profitable portfolio of cash-generating rentals in under 10 years. The sooner you begin, the sooner you will be able to achieve your financial goals.

Bottom Line

The BRRRR method is an excellent real estate investing strategy that can help investors build equity and scale their investment portfolios quickly. However, it takes a lot of time, research, and effort to do it successfully.

Have a question about real estate investing? Get an answer in our Facebook Mastermind Group.

The post How to Use the BRRRR Method to Build Passive Income in Real Estate (Quickly) appeared first on The Close.

Over the past 27 years, I have invested in hundreds of properties. And I’ve helped just as many people with their first real estate investment. While it can seem daunting, don’t worry. I’ll walk you through my proven process for flipping houses—from doing market analysis all the way through financing, creating a budget, renovating, marketing, and selling your property. Let’s get started.

How to Flip a House: 10 Steps to Flipping Houses the Right Way

Real estate investing has been a passion of mine since I was a child. I learned how to start flipping houses the old-fashioned way—through plenty of trial and error. Since then, I have spent much of my real estate career coaching real estate agents and investors and advising them how to find, buy, fix, and resell real estate the right way.

While there are many different approaches to flipping houses, I prefer the simple one. My guide, which explains how to start flipping houses, is just that—a simple approach to finding and flipping real estate. It has served me well in my career, and I hope it works for you too.

The most common question I get regarding flipping houses is “Is the market right for fix and flipping?” or “Is my market right for flipping houses?” That’s why the first step to any successful flip is determining the direction of your local market.

1. Determine the Direction of the Market

It might sound like a cliche, but the market is always right for flipping houses. Yes, really. After all, you shouldn’t be worried about where your market is right now. Instead, your primary concern should be the direction the market is going and the pace at which inventory is selling.

Seller’s Market: Home Prices Are Rising

In a seller’s market, homes are appreciating. That means the market is moving in an upward direction, and homes are selling quickly.

In this type of market, home prices are likely to be slightly higher for a property you’ve purchased, remodeled, and then marketed. This is a good thing. The wind is in your sails!

The main benefit of a seller’s market is that homes sell fast and for near or even above their asking price. The downside is that it is harder to find undervalued properties.

Buyer’s Market: Home Prices Are in Decline

On the flip side and in a buyer’s market, the repaired value of a property may end up being lower than you expect or are estimating at the time you purchase a property. It also may take longer to sell your fix-and-flip property once renovations are completed.

Buying a property knowing it might be worth less in the future scares many people. However, there are still ways to make money in a buyer’s market.

In a buyer’s market, there are considerably more motivated sellers who are open to lower-priced offers. The secret to flipping houses in a buyer’s market is to reduce your offer price to compensate for the declining prices and longer hold times.

Of course, in any market, the nicest homes sell first. As long as you are putting out great work and budgeting properly (so you don’t overprice your flips), you will always have buyers for your properties—regardless of market conditions.

2. Find Fix & Flip Opportunities

Flipping houses involves buying dilapidated or outdated properties, remodeling them, and selling them for a profit. Fix-and-flip investors must have the skills to find undervalued real estate opportunities, evaluate them, and manage contractors to ensure their “flips” are completed on time and within budget.

Finding properties to fix and flip isn’t as easy today as it once was. For example, the properties listed on your MLS probably won’t have margins large enough to make a hefty profit—or any profit at all.

The secret to finding fix-and-flip properties today is to identify off-market homes and homeowners who are highly motivated to sell. These may be homeowners who are in financial distress due to circumstances beyond their control, such as foreclosure, divorce, job loss, or bankruptcy.

Once identified, savvy investors approach them with an offer to take the burden of the property off their shoulders. Some of these properties are distressed, neglected, or abandoned, so an “as-is” quick closing is very attractive to the potential seller.

Finding motivated sellers isn’t easy, which is why I offer a complete course on finding motivated sellers and off-market listings at The Close Pro called Survive & Thrive With Sean Moudry.

Visit The Close Pro

3. Evaluate Fix & Flip Opportunities

Once you have found a good fix-and-flip opportunity, you’ll need to evaluate the property to make sure you know what you are getting into before you buy it. It’s at this juncture that many new fix and flippers cut corners and make career-ending mistakes.

To prevent that from happening to you, check out my fix and flip risk assessment process and learn how to evaluate fix and flip projects like a pro in my recent articles. These should help to ensure you don’t make some of the most common mistakes even experienced house flippers sometimes make.

4. Establish the Right Offer Price

“You make money when you buy the property, not when you sell it.”

In other words, the price you pay for the property will determine the profit you will make when you sell. If you overpay, chances are you won’t make any profit at all. This error is more common than you might think.

Anyone who has been investing for a long time has made the mistake of overpaying for a property. I know I have, which is why I came up with my Fix-and-Flip Risk Assessment Worksheet—a tool that will force you to slow down and focus so you won’t overlook property details that may cost you big money later.

My worksheet also creates a numeric risk score to help you narrow your offer price range to avoid overpaying for a property.

5. Negotiate the Price & Terms

Once you have determined your offer price on your fix-and-flip opportunity, you will need to negotiate the price and terms with the seller. For some people, negotiations come naturally, and for others, it may take a little practice.

I have found that the best way to negotiate the best price for fix and flips is to meet with the seller face to face and share your concerns about the property openly and honestly. Explain how much work it will take to get their property “resell ready” and emphasize that your profit is not guaranteed.

Next, remind them why your offer is the best one. Accepting your as-is offer that closes quickly will help the seller move on with their lives painlessly.

Lastly, bring the completed contract with you. I can’t tell you how many times I have come to verbal terms with a seller, only to have them get cold feet a few hours later. As soon as they agree to the terms, make the adjustments to your contract and ask them to sign the contract immediately to secure your deal.

6. Find the Right Financing

Fix-and-flip financing is different from other types of real estate financing. When you’re financing a home to live in, the lender puts most of the qualifications on the borrower’s ability to pay the mortgage back over 30 years.

We use “hard money” lending when flipping houses—which means short-term loans generally paid back within six to 12 months. This quick turnaround time means that hard money lenders will take a closer look at the property than at the borrower’s finances.

With the higher risk involved for the lender, they’ll charge higher upfront fees and interest rates. For a complete breakdown of how to choose a hard money lender and my top picks for fix-and-flip lenders, read my hard money lenders guide.

Cash Is King & Queen When Flipping Houses

Before you even consider making an offer on a potential fix-and-flip opportunity, you need to ensure that you (as the buyer) or your client has access to enough cash to close the deal. If you don’t have cash, Kiavi is a good option. They offer competitive rates, fund quickly, and work with brand-new investors, which not all hard money lenders do.

7. Create Your Renovation Budget

It may sound counter-intuitive to create your budget after you’ve made an offer, but the truth is, you often won’t have time or access to the property to complete an accurate budget beforehand.

Keep in mind that you haven’t closed on the property yet, and there is still time to back out of the deal, though you’ll risk losing your earnest money. You can also try to renegotiate if you find that your initial estimates fall short of the actual rehab budget.

Many project management software providers offer outstanding estimating software. However, I have found a simple spreadsheet like this one to suffice for most light remodel flippers.

Just remember “garbage in … garbage out,” meaning if your initial estimates are wrong, the spreadsheet will also be incorrect. If you are brand-new to remodeling and flipping houses, I highly recommend using a professional contractor to help you develop estimates for the work that needs to be completed.

8. Close on the Property

The big day has come, but don’t get too excited. Before you go into the closing and sign your name to your first flip, take a minute to review all the information you’ve gathered so far from each of the steps outlined here.

Did you investigate everything thoroughly? Did you get all your estimates back? Which issues, to the best of your knowledge, may come back and bite you later? This moment is your last opportunity to take a pause or walk away completely. Don’t take this step lightly.

Once you feel confident that you have your questions answered and the issues you are aware of can be managed if and when they arise, walk into the office and confidently sign the paperwork to buy your first flip.

9. Hire Contractors & Remodel the Property

Now the real work begins! It’s time to remodel the house.

One of the biggest mistakes new fix and flippers make is to try to do all the work themselves. Even if you are a professional contractor and planning on this course of action, you will still want (and possibly need) to secure quotes from other contractors. Lenders will require bids from several contractors.

It’s unlikely that you’ll be able to pay yourself for remodeling the property until after it sells, so you’ll need income from another job. But working on your flip in the evenings and on weekends isn’t going to cut it. You’ll need to get the home remodeling finished quickly.

One rule of thumb is to be in and out in less than five weeks—meaning from the day of closing to the day you put the home back on the market. Here’s why timing is so important: The longer you hold a property, the larger your finance costs.

The other reason is that time is money. If I spend a large chunk of my week renovating this property, I am potentially missing out on other fix-and-flip opportunities. Some of those opportunities will offer better margins, and as a result, will be snapped up quickly.

So get multiple written bids from contractors and plan on using them to finish the project faster and keep you focused on finding the next project. Trust me, the money spent on contractors will offer you the best return on investment (ROI) over the long run.

10. Market & Sell Your Fix & Flip for a Profit

Another common misstep fix and flippers make is cutting corners on marketing the home once it is completed. I know that after weeks of hard work, you’re probably excited to get your masterpiece on the market. But you can’t cut corners here. Any realtor worth their salt will tell you: Marketing and selling homes is hard work.

Before placing the for sale sign in the yard, you need to complete the full punch list and professionally clean the house. Selling a home is about getting a buyer excited about living in the home. If they see unfinished details, construction debris, or dusty and dirty windows, they’ll think you have cut corners in areas they cannot see.

Next, you will want to stage the property. It is a well-known fact that staged properties sell faster and for more money than vacant properties. A professional staging company charges between $1,000 and $4,000 to stage an empty home. If you don’t have room in your budget for staging, consider virtual staging.

Finally, if you’re not a licensed real estate agent, hire one. Many fix and flippers have their real estate agent license so that they don’t have to pay a commission each time they sell a home.

Hire an experienced agent who knows how to market your fix and flip and drive buyers to your door—and in some cases, multiple offers too. They’re worth their weight in gold. Having another real estate pro who can handle your sale for you will give you time to focus on your next fix-and-flip opportunity—without worrying about managing the details of a real estate transaction.

Bottom Line

Like Mike Tyson said, “Everyone has a plan until they get punched in the mouth.” Mike was right, and his advice applies to flipping houses. No plan is perfect, but I’m sure he would agree that some planning is far better than no planning at all.

So, before you get too excited and jump into your first fix and flip, take some time to review these steps and my fix and flip risk assessment process and worksheet. Otherwise, you are sure to get punched in the face by an otherwise avoidable mistake.

The post Fix & Flip 101: 10 Steps to Flipping Houses (the Right Way) appeared first on The Close.

In this article, I will walk you through my Property Evaluation Process that I use to evaluate my fix-and-flip projects and determine the right offer price using my Fix-and-Flip Property Risk Worksheet. Make a copy of the worksheet, then read on to learn how to thoroughly evaluate your next fix-and-flip project.

Tools You’ll Need to Properly Evaluate a Fix & Flip

Be prepared to get dirty when you’re evaluating your fix and flip. Bring some old clothes or coveralls so you can get into the crawlspace and attic. Don’t forget some water on hot days because this could take an hour or two. Here are some essential and handy tools I suggest you bring when evaluating a fix and flip:

• Your cell phone and charger to take videos and photos
• A ladder to look on the roof (I don’t suggest getting onto the roof)
• A measuring tape to measure the rooms, cabinets, and yard
• An outlet meter to check the outlets and ground fault circuit interrupter (GFCI) circuits
• A moisture meter
• A flashlight and extra batteries
• An awl or sharp screwdriver to poke into wood trim, baseboards, and subfloors to check for rotting wood and moisture damage
• A large level and some marbles to check the floors and counters to see if they are plumb
• For older properties, test for lead paint with low-cost, lead-based paint test kits

My Fix & Flip Property Evaluation Process

I developed my Property Evaluation Process to ensure that no part of the property would be overlooked. Using the Fix-and-Flip Property Risk Worksheet, you will start with the interior and work your way throughout the house. Then, once you finish assessing the interior, you’ll move on to the exterior.

For detailed instructions on how to use my risk worksheet, refer to our recent article Fix & Flip Risk Assessment: How to Make the Right Offer. As you evaluate the property room by room, you will rank the condition of each area or item on the worksheet based on the cost or amount of work the area or item will need.

1. Evaluating a Home’s Interior

The Living Room

Start with the interior. Walk into the living room and take a long slow sniff: Do you smell any odors from pets, mildew, mold, or smoke? Believe it or not, strong odors can be costly to fix.

Take a look at the floors. Are there stains or tears in the carpets? Will they need to be replaced, or can you recondition them? Are the floors level, sagging, or soft? Each of these issues can be a sign of water or structural damage.

How are the walls? Are they damaged or need painting? Check the ceiling; is it a popcorn texture? Could it be asbestos?

Mark all the potential risks on your Fix-and-Flip Property Risk Worksheet.

The Kitchen

Walk into the kitchen. Are there tears, stains, or cracks in the tile or linoleum? Do the floors need to be replaced?

Check under the cabinets. Is there visible water damage? Can the cabinets and countertops be salvaged, or is it time to upgrade them? How about the kitchen appliances? Are they off-color or at the end of their lifespan?

Use the outlet meter to check the outlets to see if they are working and on a GFCI. This is a crucial step because you may be required to add GFCI outlets when you remodel.

Plan on spending most of your budget in the kitchen. It is the most expensive room in a house to remodel. A good appliance package alone can run upward of $4,000, and cabinets and countertops can cost an additional $10,000 to $20,000. But if done right, the kitchen can also give you the most return for your buck.

List the needed repairs on your Fix-and-Flip Property Risk Worksheet and move to the bathrooms.

The Bathrooms

The second-most expensive rooms to remodel are the bathrooms—especially the en-suite bathroom. Like the kitchen, evaluate the plumbing under the cabinets, behind the throne, and in the shower or tub.

If there is a jetted tub, fill it with water and run the jets. Check for leaks and black mold coming out of the jets.

Check the linoleum or tile for cracks, stains, and tears. Place your foot near the base of the throne and press down. Does the floor feel soft? Does the toilet wobble? These may be indicators of water damage in the subfloor, which will require an expensive repair. Repeat this test on the floor near the showers and bathtubs. Lastly, check for the bathroom outlets for GFCI circuits.

The Primary Bedroom

Besides the kitchen, the primary bedroom is the main focal point of a home for most buyers. So it must be in tip-top shape after the remodel.

Don’t get too hung up on the current condition of the bedrooms because you’re probably going to replace all the flooring and paint the walls anyway. You are mainly checking the size and shape of the room. Is it large enough for a king-sized bed, end tables, and a dresser? Does it get decent light, or do you need to add a window or skylight?

Many buyers are looking for primary bedrooms with en-suite bathrooms. Is there a bathroom attached or room to add one? Is the closet a walk-in or large enough for the clothes of two people? If not, is there room to add one?

Note any missing or broken doors, door hardware, and light fixtures on the Fix-and-Flip Property Risk Worksheet.

The Secondary Bedrooms

The condition and size of the secondary bedrooms are less critical than the primary bedroom, but you shouldn’t overlook them. Keep in mind that a three-bedroom home appeals to a larger buyer pool than a two-bedroom, so if the property has less than three bedrooms, you may want to consider the cost of adding another bedroom if the home’s floor plan permits.

Additionally, many people work from home today and are looking for homes with quiet home office spaces.

2. Evaluating a Home’s Exterior

Impatience and excitement can lead you to overlook important details when evaluating your potential fix-and-flip deal. Take the time to inspect the entire exterior and yard thoroughly, even if the interior is in great shape. In my haste, I’ve missed structural cracks that would have been easily spotted had I taken the time to walk around the entire property with a critical eye.

While inspecting the exterior, look for cracks and sagging windows and doors. These are signs of settling in the foundation and could be signs of a much more significant and costly problem.

If you brought a ladder, take a peek at the roof. Are there missing, damaged, or curled roofing shingles? Are the gutters and downspouts attached? Do you see any water damage to the fascia and siding?

How are the siding and paint? Flaking paint and damaged siding will need to be repaired and painted. Will the current paint color attract the attention of a modern buyer?

Check the windows and exterior doors. Are they operational and energy-efficient? New windows and doors can dramatically change a home.

Evaluate the Yard, Driveway & Lot

Are the driveway and patio unlevel or cracked? How is the size and shape of the lot? Is it level and graded properly?

Walk the entire yard. Does it need a new sprinkler and sod? Are there any dead trees or bushes that will need to be removed or replaced?

Are there obstructed views, noisy roads, nearby utilities, or a lack of privacy that may affect the resale value?

Is there trash or junk that may be left behind? My experience has been that no matter the agreement, homes and yards full of trash and debris are still full of trash and debris after the occupant moves out.

Write all your concerns on the worksheet.

3. Evaluating a Home’s Mechanical Systems

You must always inspect the basic mechanical systems, including the heating, cooling, plumbing, and electrical systems. Some properties may also have swimming pools, hot tubs, fireplaces, wells, and septic systems. Make sure to inspect all of them thoroughly.

Keep in mind that when you’re buying a property to flip, you’re most likely making an as-is offer to a seller who doesn’t have the desire or the ability to make repairs. To get top dollar for your fix and flip, you need to convince buyers that you didn’t just make the place look nice—you also addressed mechanical and structural issues.

When possible, have professionals inspect the property’s mechanicals, sewer line, and septic system for their functionality and lifespan when you’re flipping homes. While this may cost you a few hundred dollars today, it may save you thousands down the road.

In some instances, as in a foreclosure, you won’t have the time or opportunity to have these items inspected by a professional. Therefore, you will have to make some educated assumptions about their age and functionality and adjust your offer price for the additional risk of buying the home without in-depth knowledge of their condition.

When flipping homes, always err on the side of caution. For example, if the furnace and water heater are more than 20 years old, assume you will need to replace them to sell a safe and reliable property to the new buyer.

Evaluate each mechanical item and score them on your worksheet.

4. Evaluating Other Factors

Once you’ve completed your evaluation of the physical condition of the property, don’t forget to look into the zoning, flood zones, homeowner associations (HOAs), property taxes, and local sales tax. When overlooked, these items can cause you a lot of headaches or eat up all your profits.

Many investors who are new to flipping homes make the mistake of buying properties to rent them as short-term rentals. Unfortunately, many investors are unaware of local ordinances or HOA rules on short-term rentals—or simply ignore them—only to find out later that they’re prohibited from vacation renting the home.

On the other hand, savvy investors understand that by overcoming obstacles, they can take a low-value property and turn it into massive profits. Knowing how various factors can impact a property’s value can help you avoid big mistakes and turn other people’s lemons into lemonade.

Bottom Line

My approach to flipping homes takes the emotion out of the process, forcing you to slow down and think carefully, so you can focus on getting the best ROI for yourself or your investor clients. Taking a cautious approach to flipping homes will prevent you from overpaying, or worse—buying a property with extensive damage you may have overlooked. My Fix-and-Flip Evaluation Process and Fix-and-Flip Property Risk Worksheet have prevented me from making costly mistakes, and I hope these serve you just as well.

The post How to Evaluate Fix & Flip Houses Like a Pro (+ Risk Worksheet) appeared first on The Close.

In this article, I’ll cover the basics of hard money loans, how to choose a hard money lender that’s right for you, and how to get approved for financing. I’ll also share my top picks for hard money lenders, and so much more. Let’s get started.

What Is a Hard Money Loan?

How Does a Hard Money Loan Work?

What Are Hard Money Loans Used For?

How to Choose the Right Hard Money Lender

While choosing the right hard money lender for your investment can be challenging, there are five key criteria that investors use to select the right lender for their project:

1. The Type of Real Estate Project You Need to Finance

The most important criteria to consider when choosing a hard money lender is the type of real estate project you need to finance. Some hard money lenders specialize in fix and flip properties, while others are cash flow, buy and hold lenders. It’s also important to note that not all hard money lenders will finance multi-unit or owner-occupied properties.

2. Interest Rates

Unlike most traditional mortgage lenders, hard money lenders are private individuals or companies lending their own money. Therefore, each has its own interest rates (within the legal limits, of course).

3. Loan-to-Value Ratio (LTV)

The amount a hard money lender will lend on a property often depends on the type of project, the borrower’s credit, and the asset being purchased. Still, like interest rates, each hard money lender has different loan-to-value ratios.

4. Upfront Fees

5. The goal of most hard money lenders is to make short-term loans that are repaid quickly so they can lend their money out multiple times each year. To maximize their profits, they charge upfront fees of between 1% and 5%. These fees are typically labeled as either Origination Fee, Upfront Fee, or Points.

5. Credit and Experience Requirements of the Borrower

While many hard money lenders prefer to work with experienced investors with a good credit history, some are open to newer investors or investors with less than perfect credit.

The Best Hard Money Lenders

There is no “one-size-fits-all” hard money lender because each borrower, project, and situation is unique. Therefore, selecting the right hard money lender for your real estate investment purchase will depend on you and your project needs.

To make your search easier, I put together this Best Hard Money Lenders list for each investment category.

Best Overall Hard Money Lender for Investment Properties	Kiavi
Best Overall Hard Money Lender for Fix & Flips	RCN Capital
Best Hard Money Lender for New Investors	Lima One Capital
Best Hard Money Lender for Low-interest Rates	Groundfloor
Best Hard Money Lender for No Down Payment	DoHardMoney

Best Overall Hard Money Lender for Investment Properties

Finding hard money financing for long-term, buy-and-hold properties can be challenging. The good news is that Kiavi specializes in just that: hard money loans for rental properties.

Kiavi uses the rental income from the property to help you qualify for the mortgage. This unique feature allows even a low-income or self-employed borrower to build an investment portfolio.

Kiavi offers loans on single-family homes, duplexes, and multi-family properties of up to four units. The term of their loans is 30 years, with a three-year prepayment penalty.

With adjustable rates starting at 3.875% with a 5/1 or 7/1 Adjustable Rate Mortgage (or ARM), and they even have an Interest Only option. To illustrate, a 5/1 ARM is a mortgage with a rate that’s fixed for the first five years, then your rate can adjust up to 1% each year after that.

Kiavi Rates & Terms (2021)

Interest Rate:	3.875%+ APR
Loan-to-Value:	80% LTV
Upfront Fees:	$550 Appraisal, 1.5% Origination Fee, $999 Closing Costs
Credit Requirement:	No Hard Credit Pull
Investing Experience:	No Experience Required, Past Mortgage Required
Maximum Loan Amount:	$2.0 million
Prepayment Penalty:	YES
Property Types:	Townhouse, Single-Family, Duplex, Multi-Unit up to 4-Units, No Owner-Occupied Homes

Best Overall Hard Money Lender for Fix & Flips

If you’re looking for a hard money lender that can offer low down payment financing, competitive interest rates, and 100% financing of the renovation costs and fees for your next fix and flip, then look no further than RCN Capital.

RCN Capital’s After Repair Value Loans will provide financing for up to 90% of the purchase price of your fix and flip property, plus 100% of the renovation costs up to 75% of the property’s After Repair Value (ARV).

With interest rates starting at 7.49% (Interest Only) for experienced investors, and up to a 12-month term, this loan is available for all property types, including condos, townhouses, single-family and multi-family homes, and mixed-use properties.

RCN Capital Rates & Terms (2021)

Interest Rate:	7.45%+ APR
Loan-to-Value Ratio (or LTV):	90% of the Purchase Price and up to 75% of ARV for Renovation Costs
Upfront Fees:	2% to 5% of the Loan Amount
Credit Requirement:	620 Minimum Credit Score
Investing Experience:	Two fix and flips in the past three years
Maximum Loan Amount:	$2 Million (Up to $5 Million for Multi-family and Mixed-Use)
Prepayment Penalty:	NO
Property Types:	Condo, Townhouse, Single Family, Duplex, Multi-Unit, Mixed Use, No Owner Occupied

Best Hard Money Lender for New Investors

Lima One Capital offers fix and flip loans for real estate investors with no fix and flip experience. They require their inexperienced borrowers to have a minimum credit score of 660 and the property to require no significant rehab, such as structural damage repair.

With rates starting at 7.5% for fix and flip loans, they don’t have the lowest interest rates or fees compared to some other lenders. Additionally, their maximum loan amount is limited to 70% of the After Repair Value (ARV), which means that you may need to be prepared to pay for a larger proportion of the repairs out of pocket.

Lima One Capital Rates & Terms (2021)

Interest Rate:	7.5% to 9.75% APR
Loan-to-Value:	90% of the Loan-to-Cost (LTC) and up to 70% of the Loan-to-Value (LTV) for Renovation Costs
Upfront Fees:	1% to 2.25% of the Loan Amount
Credit Requirement:	660 Minimum Credit Score
Investing Experience:	No prior experience required
Maximum Loan Amount:	$3 million
Prepayment Penalty:	NO
Property Types:	Property Types: Townhouse, Single Family, Multi-Unit up to 4, No Owner Occupied

Best Hard Money Lender for Low-interest Rates

Groundfloor is genuinely in a league of its own when it comes to hard money lenders because they use crowdfunding to fund your fix and flip loan. Accredited investors compete to fund your projects, allowing you to access to the best interest rates—often up to 2% lower than those offered by other hard money lenders.

Groundfloor also offers fix and flip loans for multi-family properties of one to four units in size—in 31 U.S. states. There are no payments during the term of the loans, and they allow you to roll your loan fees into the borrowed amount.

Groundfloor Rates & Terms (2021)

Interest Rate:	5.5%+ APR
Loan-to-Value:	80 to 100% of Loan-to-Cost (LTC) and 75% of After Repair Value (ARV)
Upfront Fees:	$495 Evaluation Fee, 2.75 to 4% Origination Fee (Can be financed), $1,200 Doc Prep
Credit Requirement:	600 Minimum Credit Score
Investing Experience:	No minimum transactions experience required
Maximum Loan Amount:	$1 million
Prepayment Penalty:	NO
Property Types:	Fix and Flip, New Construction, Condo, Townhome, Single Family, 1 to 4 Units

Best Hard Money Lender for No Down Payment

Fix and flip financing that covers 100% of your outlay is hard to find. DoHardMoney will finance 100% of the purchase price, and in some cases, they will also finance 100% of the repair costs. DoHardMoney will finance the purchase price and repairs up to 70% of the property’s After Repair Value (ARV).

What’s the catch? Well … DoHardMoney’s 100% loans are limited to a maximum loan amount of $250,000, so if you’re in an expensive area, these may not work for you. The 100% loan also has higher upfront fees of 6.5% and higher interest rates than other hard money loans. However, you won’t have monthly payments for up to five months.

DoHardMoney Rates & Terms (2021)

Interest Rate:	5.5%+ APR
Loan-to-Value:	80 to 100% of Loan-to-Cost (LTC) and 75% of After Repair Value (ARV)
Upfront Fees:	$495 Evaluation Fee, 2.75 to 4% Origination Fee (Can be financed), $1,200 Doc Prep
Credit Requirement:	600 Minimum Credit Score
Investing Experience:	No minimum transactions experience required
Maximum Loan Amount:	$1 million
Prepayment Penalty:	NO
Property Types:	Fix and Flip, New Construction, Condo, Townhome, Single Family, 1 to 4 Units

Hard Money Lending FAQs

This is a very broad topic and you may still have questions about hard money lending, including how to get a hard money loan, interest rates, and the differences between hard money lending and conventional home mortgage financing. We are here to help! Build off of the work I have done for you already—but don’t stop there. Continue to ask questions of potential lenders and research their terms to find the right hard money lender for you and your next real estate investment project.

How do you get approved for a hard money loan?

What costs are involved in a hard money loan?

Do I have to make payments on a hard money loan?

How are hard money lenders different from other mortgage lenders?

Why are interest rates higher on hard money loans?

What type of loans do hard money lenders offer?

Do hard money lenders cover renovation costs?

How fast can I get a hard money loan?

Do I need an appraisal for a hard money loan?

Do hard money lenders check your credit?

Bottom Line

Hard money lenders are not for everybody, but if you are either a new or experienced investor, a hard money lender can become an indispensable partner to you. Like any investment, there is risk involved. You can significantly reduce your risk by doing your research and acquiring as much knowledge as possible. If you have unanswered questions, please drop them in the comments section.

The post The Best Hard Money Lenders in 2022 (Interest Rates, LTV, Fees & More) appeared first on The Close.

In this article, I’ll share with you the most common reasons investors overpay for fix-and-flip investment properties and help you calculate the property risk score using my proven fix and flip risk assessment worksheet.

5 Common Fix & Flip Mistakes That Even Experienced Investors Make

Armed with Carlton Sheets’ investment worksheets at 19 years old, I evaluated my first investment property. Since that day, I have evaluated thousands of homes to determine the right offer price.

While there are many reasons even seasoned investors pay too much for a property, there are five common mistakes that you can easily avoid—if you know what you’re doing. I’ll help guide you, so you don’t find yourself underwater on your next fix and flip.

1. Letting Emotion Guide Your Offer

Enthusiasm for doing a deal is great for motivation. Still, it can override your rational thinking and prevent you from seeing a property for what it is, causing you to overlook critical repairs and ultimately overpay for the property.

Before getting out of your car to evaluate the property, take three deep breaths to slow your heart rate and calm your mind for the important task ahead.

2. Offering Sight Unseen

You may be busy, you may know the area, or maybe you’re just lazy. Either way, it’s never a good idea to make an offer sight unseen. Sure, I have done it—and I have paid the price. Literally!

It is often better to pass up a good deal than risk paying too much for a property that you will never profit from—or worse, one that’ll cause you to lose money. Take the time to see each property before making your offer.

3. Overestimating Your Abilities

Show me an overconfident investor, and I’ll show you someone who’s about to make a huge mistake! The secret to remaining a real estate investor is surviving your mistakes and the unpredictable market shifts. Overestimating your abilities can cause you to take bigger risks and increase the chances that your investment career won’t survive a shift in the market.

A little fear is actually a good thing that will keep you humble and able to outlast the “all-in” real estate investors.

4. Overlooking Other Factors

The issues that can turn a good flip into a nightmare are not limited to just the physical condition of the property. Other factors that are often overlooked are zoning restrictions, homeowners associations (HOAs), as well as property and sales tax.

Once you have evaluated the physical condition of the property, take a few hours to investigate these items to ensure your budget can absorb additional expenses.

5. Underestimating the Time a Project Will Take

Paint and carpet … one week, remodel the kitchen and bathroom … one month, vault the ceiling and put on an addition … six months! It is easy to have big dreams for the property, but everything you’re dreaming of adds to the timeline. Especially when the remodel requires Zoning and Permit department approvals.

Be realistic about the time it will take to repair a property and give yourself an extra buffer in case of delays caused by things outside of your control, like government approvals, weather, and contractors.

Time is money, and everything you add to your budget needs to factor into your final offer price. Since you can’t simply sell the property for any price you want, the greater the costs to repair and hold the property, the lower you can feasibly pay for the property.

To help keep me and my coaching clients from overpaying, I created the Fix-and-Flip Property Risk Worksheet.

My Fix & Flip Property Risk Assessment Worksheet

I designed the Fix-and-Flip Property Risk Worksheet to help you stay focused on any items you need to address. Once you complete your property assessment, you can use the worksheet to help you generate the right offer price to ensure you have profit left after making the necessary repairs and the property is sold.

Visit Kiavi

How to Use My Fix & Flip Property Risk Worksheet

Unlike typical home shopping, where you’re looking at the attractive features of a home when you buy a fix and flip, you want to identify all the items that will cost you big money to repair when you remodel and sell it.

Using the worksheet, you will walk through the property room by room. Follow my Property Evaluation Process to make sure you don’t rush or overlook any little detail. You will give each item on the worksheet a score. The lower the score, the less work you’ll need to do to the property. Be sure to take good notes and photos as a reminder.

Then when finished walking the property, go back to your office and do additional research on the other factors that can positively or negatively affect the property, like the HOA, taxes, and zoning.

Once your research is complete, you will use the worksheet to determine the Property’s Risk Score and decide your offer price range.

The Property Risk Score

You’ll give the property a Risk Score to help you evaluate your risk and determine your final sales price. The higher the score, the greater your risk. A property that needs minimal repairs may score between 0 and 15 and is considered low risk. A foreclosed property offered for sale in as-is condition may score 45 to 50 would be regarded as a high-risk property.

The higher the risk score, the greater your risk involved, and the less you’ll want to offer for the property. How to calculate the risk score will be explained in detail later.

The Seller’s Motivation & Offer Price

While the property’s condition is important, the seller’s motivation and urgency to sell are often the most significant factors to consider when determining the offer price.

For example, a friend once contacted me regarding a family member urgently wanting to sell their home because their foreclosure sale date was seven days away!

With a looming deadline, I had to inspect the property, arrange for financing, and clear title in less than a week! The seller’s urgency meant additional risk for me, and I adjusted my offer price accordingly. The property might have sold for $300,000 if the seller had the time to market it in the MLS. I paid the discounted price of $230,000 to assume the risk—buying it quickly and helping the seller avoid foreclosure.

However, before you make an offer, you must first forecast the property’s likely selling price range after all the repairs are completed, and the property is expertly marketed. This price is called the After Repair Value, or ARV.

Determining the ARV (After Repair Value)

Look in the MLS for recent sales of similar properties that have been sold in the past 90 days. Have any of them been completely remodeled? If so, this may be a good range for your ARV.

If there aren’t any recent sales of remodeled homes in the area, you can adjust for the remodel by using homes in average condition and adding a premium for the remodel. In many markets, completely remodeled homes with new kitchens, baths, and mechanicals sell for up to 20% more than homes in average condition.

Once you have determined the ARV, you can use the Fix-and-Flip Property Risk Worksheet to help determine your offer price.

Determine Your Offer Price

Now that you have evaluated the property’s condition, factored in the seller’s urgency, and decided on the property’s ARV, we can assess the Property’s Risk Score and pinpoint the right offer price.

Calculate the Property Risk Score

Using the Fix-and-Flip Property Risk Worksheet, total the number from each category and write the number on the Property Risk Score line.

1. Check the box that is associated with that number range.
2. Look to the right to see what the offer price range should be. For example, if the ARV of the property is $450,000 and the Property Risk Score is 42, then your offer price range should be between $315,000 and $337,500 ($450,000 x .70 and .75 = $315,000 and $337,500).

Once I have found the appropriate price range, I can feel confident about what I am offering and know when to walk away when the asking price is too high. This approach is how you prevent yourself from overpaying and finding yourself upside down in a fix and flip.

Bottom Line

Flipping homes is exciting. It’s easy to get caught up in the romantic idea of buying an ugly duckling and making it a beautiful swan, but don’t let the dream cloud your judgment, leading you to overpay and ruin any possibility of future profits.

Follow these guidelines and use my fix and flip risk assessment worksheet to help you avoid the common mistakes many investors make, including overpaying for their fix and flips.

The post Fix & Flip Risk Assessment: How to Make the Right Offer (+ Worksheet) appeared first on The Close.

If you can identify investment opportunities for yourself, you can find them for your clients as well. In this article, I’ll share three types of real estate investment opportunities that may help you and your clients build generational wealth.

1. Fix & Flip Real Estate Investing

In case you have been living in a cave without HGTV, fix-and-flip investing is buying a property, remodeling it, and quickly reselling it—hopefully for a hefty profit!

Most real estate agents stay clear of flipping homes, choosing instead to focus on helping buyers and sellers. However, due to the aging and outdated housing inventory and the inability for new construction to keep pace with growth, I predict flipping homes will soon become a common source of business for both real estate agents and brokerages.

To remain competitive, they’ll purchase outdated homes and update the mechanicals and fixtures to appeal to the demands of buyers who don’t want to deal with costly repairs. This shift will make flipping homes more than just a side business and the domain of just a few agents and investors.

When you learn how to find and analyze “fix-and-flip” investments, you’ll know how to generate a little extra money for yourself or your handy investors.

How to Spot Fix & Flip Opportunities

As real estate agents, we’re on the front lines when it comes to dealing with homeowners’ financial problems. Personal challenges like bankruptcy, divorce, death, and job loss can force homeowners to sell quickly. Many of these properties are in poor condition, making them ideal for a quick flip.

Companies like Zillow, Offerpad, and Opendoor have already figured this out. Their model of purchasing such homes has proven that there are a significant number of desperate sellers who don’t have the time or resources to sell their homes the traditional way. Such sellers are often willing to sell at a deep discount for the convenience of selling their homes quickly, in AS-IS condition.

Today, the public data from preforeclosures, bankruptcies, divorce, and death are easily accessible. Armed with the right systems and scripts, you’ll be able to find deals that are ripe for flipping. If you want to learn more about finding motivated sellers, we offer a course available with every Close Pro membership.

If you want an easy to use, accurate, and up-to-date source of distressed properties like preforeclosures to pitch, foreclosure.com is a good place to start looking for investment leads.

Visit Foreclosure.com

To be clear, I am not a proponent of taking advantage of people in difficult situations. However, maintaining a list of real estate investors (including yourself) who are ready, willing, and able to purchase properties in as-is condition quickly is a service you can provide to help distressed homeowners. After all, they need to sell quickly, and you can help them do just that!

2. Cash Flow Real Estate Investing

Cash flow investing is investing in properties where the rental income is greater than the costs associated with the property. Paying off the mortgage with rental income instead of appreciation is the primary goal of cash flow investing.

While appreciation is an additional benefit of cash flow investing, it’s usually not factored into the analysis or purchasing decision. The long-term goal of cash flow investing is to eventually have a paid-off property that will forever generate passive income.

Think about cash flow investing this way: What if you owned an asset that someone else paid for, and it paid you thousands of dollars each month—BUT—you could never sell it? Would you be OK with that? Of course you would! So would your clients!

Appreciation isn’t a factor with cash flow investments because the goal is never to sell them.

How to Identify Cash Flow Real Estate Investing Opportunities

Everyone knows that real estate markets fluctuate over time. What goes up must come down. Those market downturns are where the cash flow investing opportunities lie.

The challenge is having the guts to jump in and buy when everyone else is running scared. Famed investor Warren Buffet once said, “Be fearful when others are greedy, and greedy when others are fearful.” If you’re working with buyers, part of your job is to help them understand this basic principle of investing in real estate.

The other challenge with investing long term in real estate during a down market is having access to financing. During recessionary periods, banks and investors become hesitant to invest. Loans are harder to secure. Banks and lenders often raise requirements, down payments, and interest rates for borrowers to protect themselves from risk.

As a result, you and your potential investors must prepare in advance for any market downturns. Have additional cash reserves and your financing in place so you can buy cash flow properties before the market rebounds.

If your market is too hot for cash flow investing, then maybe you should consider the third type of investing every agent needs to know about: speculation.

3. Principled Real Estate Speculation Investing

Speculation investing means buying a property with the hope that future market conditions will allow you to sell the property for a profit. Speculation differs from fix-and-flip investing because there is no need to make changes or repairs to the property.

Real estate speculation is much more than just a lucky guess. A professional speculator considers things like employment, population growth, and housing inventory before investing. You need to pinpoint opportunities where demand for the property is likely to increase over time, allowing you to buy low and sell high so that you can cash in on a hefty return down the road.

How to Find Speculation Opportunities

If you or your investors are ready to take calculated risks in real estate speculation, then your best bet is preconstruction homes. I’m not saying you should become a home builder. Instead, you can contract with a builder for the opportunity to purchase a home that has not yet been built. Many builders will agree to construct a home for a small deposit and allow you to buy the property after it is completed.

There are two benefits to this strategy: First, everybody likes new construction homes, and second, you’ll be able to lock in today’s price while someone else assumes the risks of building the home.

Some homebuilders can take six to 12 months to complete a home. High-rise condos can take years. If appreciation in your market is strong, you or your investors can potentially build tens of thousands in appreciation while risking only a small deposit before you ever own the property.

Once the property is near completion, do your final research to determine the current market value before finalizing the purchase. If it has appreciated, complete the sale and rent or resell the home. If the value isn’t there, try renegotiating or cutting your losses, surrendering your deposit, and walking away.

Beware of the Speculative Bubble

Speculation is the riskiest of all types of investing. Rapidly appreciating markets fuel greed and can convince you to jump in without relying on principled fundamentals. When too many people follow suit, it causes a speculative bubble.

The speculative bubble occurs when exuberance and justification trump logic, creating an unsustainable market. As more people jump in, they further fuel appreciation. The bubble expands until the fundamentals suddenly catch up and the market sharply corrects itself, and the bubble “pops.”

When this happens, it can leave you and your investors owning properties on which you may have to take a loss or else hold for years until the market rebounds. Despite the risks, you and your investor clients should engage in principled real estate speculation, as it’s an essential part of real estate investing.

Bottom Line

Being knowledgeable about real estate investing and participating in real estate investment are essential skills for every successful real estate agent. The more investing you do on your own, the more capable and confident you’ll become in helping your clients with their real estate investment decisions. These three strategies—fix and flip, cash flow investing, and speculation—should be the pillars of your investment career.

The post 3 Types of Real Estate Investing Every Agent Needs to Know appeared first on The Close.

While homebuyers look for homes they can afford, real estate investors often look for properties with high cash flow potential.

In your local market, you’re likely to find great investment opportunities if you know where to look and what to look for. This article will share my strategy for analyzing cash flow real estate investment properties to help you find some gems near you. We’ll explain how to calculate net operating income, capitalization rate, return on investment, monthly cash flow, and more.

As a real estate agent looking to better serve your investor clients or simply looking for properties that would be ideal investment opportunities for yourself, you’ll need to learn how to find and analyze cash flow real estate investment opportunities. You never know when your current homebuyer client might evolve into tomorrow’s investor.

Over the years, I’ve come up with a simple formula to quantify the condition and risk assessment of cash flow properties. The formula will give you a numerical score for a property to help decide whether to invest. I’ve included it as a free download below:

Download My Property Condition Risk Assessment Worksheet

Research Rental Comps

Before you start hunting for cash flow properties for your investor clients, you’ll need to have a deep understanding of your local rental market. Depending on the average age of homes in the area, I usually start by looking for comps of three-bedroom, two-bathroom, single-family homes that are 30 to 50 years old.

Most homes built from 1970 to 1990 have functional floor plans and two-car garages, especially compared to homes built pre-1970, which often have obsolete floor plans and require expensive electrical or plumbing overhauls. While newer homes usually sell for more money than older homes, they often yield significantly higher rents than properties of this vintage.

Whatever type of properties you are interested in, you can search for rental comps on websites like Craigslist, Zillow, and Rentometer. You’ll notice that rental rates vary significantly from one area to the next due to several factors, including the desirability of the location, age of the homes, nearby schools, number of bedrooms, and bathrooms.

On the microeconomic level, these factors impact what a given family is willing to pay in rent. Renters are generally seeking the same features that homeowners cherish, and these factors all affect rent rates and what a given market will bear.

Once you have determined the potential rental income of the property types you are interested in, you’ll want to compare them to the available homes for sale using the Rental Multiplier. It’s not a tech tool—just a simple math equation that’ll help you pinpoint properties with the potential for positive cash flow.

Narrow Your Search Using the Rental Multiplier

The Rental Multiplier helps you narrow your search. First, you’ll evaluate neighborhoods with higher rents. Then, you’ll use the Rental Multiplier to determine the maximum price your investor could pay for a home in a given area and still achieve a positive cash flow of $200 or more each month. The calculation is based on a traditional investor mortgage loan with a 20% down payment.

Address	Beds	Baths	Rent	Multiplier	Maximum Price
100 Main Street	4	2	$2,000	130	$260,000
555 Fifth Avenue	3	2	$1,755	130	$234,000

The Rental Multiplier is a simple math equation that effectively reduces your focus to properties where the rents are higher than .75% of the sales price, OR the selling price is about the monthly rental rate times 130.

Take 100 Main Street in the table above as an example. If the average rental rate for a three-bedroom, two-bathroom home built in the 1980s is $2,000 per month, you’ll want to look for a home that’s priced close to $260,000 ($2,000 x 130 = $260,000).

Looked at another way, the home at 555 Fifth Avenue in the table above is priced at $234,000. The Rental Multiplier will give you a benchmark rental rate to make 555 Fifth Avenue a cash flow positive investment. Since .75% of $234,000 is $1,755, you’ll know that you can get a positive cash flow from purchasing 555 Fifth Avenue if you can reasonably rent the home for $1,755 per month.

The important thing is to use the Rental Multiplier to narrow your price range to only properties that are likely to achieve positive cash flow. For most areas, I use a maximum Rental Multiplier of 130, but the part of the country where you live and work may be more or less affordable.

If it’s more affordable, then your maximum Rental Multiplier may be lower than mine, whereas if your part of the country is more expensive, you may not easily find properties with a Rental Multiplier below 130.

Increase the Down Payment to Increase the Rental Multiplier Range

If finding properties with a Rental Multiplier below 130 is unachievable in your area, your real estate investor clients may need to put more money down to achieve the desired cash flow from a given property.

If you want to pinpoint neighborhoods that are ripe for investment, then check out my recent article: How Smart Investors Find the Best Places to Invest in Real Estate.

Look Outside Your Local Area

If you still can’t find properties in your area, even with a larger down payment, you might consider looking into other markets. There are many areas throughout the U.S. where you can still find properties below a Rental Multiplier of 130.

Americans now working from home are relocating to more suburban and rural areas, thereby expanding the number of opportunities for cash flow investing. If you’re serious about working with investors throughout the U.S., you might consider researching the reciprocity and portability laws in nearby states with better deals.

Calculate the Capitalization Rate

Remember when you studied for your real estate license exam, and you thought, “When am I ever going to need this stuff?” Well, today is that day! The capitalization rate, or CAP rate, is another simple equation that you can use to determine the potential return on an investment property.

Investors also use a property’s CAP rate to compare similar properties throughout the U.S. without needing to know each property’s specific details. CAP rates are calculated based on the property’s income, expenses, and price, without regard to an individual investor’s down payment, loan terms, or financing.

CAP rates tend to be lower in areas where investor and buyer demand are high. Low CAP rates aren’t necessarily bad. Some areas with traditionally low CAP rates are more stable, meaning their property values are less impacted by recessionary times.

How to Calculate CAP Rate for Cash Flow Real Estate Invesments

There are four easy steps to calculate a CAP rate.  To make calculating CAP rate for your own properties easier, you can download my CAP rate worksheet for free below:

Download my CAP Rate Worksheet

1. Calculate the Gross Income

100 Main St
Income
Rent	$24,000
Vacancy Rate (6%)	-$1,440
Additional Income	$0
GROSS ANNUAL INCOME	$22,560

To calculate the CAP rate, you must first start with the gross income the property will generate in a year. Begin by adding together the monthly rental income. For example if the rental income is $2000 a month, the gross income would be $24,000 ($2,000 X 12 months = $24,000).

Vacancy Rate

Next, subtract the vacancy rate. Many MLS systems track vacancy rates. If this isn’t the case for you, ask a local property manager. In many areas today, an area’s average vacancy rate is below 3%, but in my experience, this isn’t realistically achievable.

If your property goes vacant once every two years and it takes you an additional month to clean it and get it rented to new tenants, then your home’s vacancy rate is actually 8% (2 months ÷ 24 months = 8.3%). For this reason, I typically use a vacancy rate of 6 to 8% to calculate a property’s CAP rate.

Additional Income

We do not have any additional expenses in this example. What constitutes additional income? Some small, multi-unit buildings generate income from on-site, coin-operated laundry, parking space fees, or even charge-backs for utilities. If the investment property you’re evaluating generates any income of this type, add it to the additional income section.

Calculating Gross Annual Income

After totaling the rental income and additional income, subtract any revenue lost due to vacancy to determine the property’s gross annual income. In this case, $24,000 in yearly rent less 6% due to vacancy, for a total of $22,560 in gross annual income.

Next, you must factor in expenses.

2. Add Together the Owner-paid Expenses

100 Main St
Expenses	Owner Paid
Annual Property Taxes	$1,800
Gas/Propane	Tenant paid
Electricity	Tenant paid
Water/Sewer	$960
Trash Service	$360
Insurance	$1,450
Homeowners Association	N/A
Property Management *	N/A
Annual Maintenance (e.g., Landscaping, Heating and Air)	$1,500
Other	N/A
GROSS ANNUAL EXPENSES	$6,070

Next, to determine the property’s CAP rate, we need to calculate the Gross Annual Expenses.

Two types of expenses are related to investment property: those that the tenant pays and those that the owner pays. When calculating the CAP rate, we will only include expenses for which the owner is responsible. All expenses are calculated on an annual basis.

Do your best to gather costs directly from the source. Listing agents and sellers tend to underestimate or omit expenses. If you can’t get the expenses directly, ask the sellers to provide the last six months in bills.

I typically don’t include property management in my CAP rate calculations on single-family homes, condos, and small multi-unit buildings (like a duplex or four-plex) because I assume the investor will be managing the property themselves. For larger, multifamily properties, I include a 10% management fee.

3. Subtract Gross Annual Expenses to Get Net Operating Income

100 Main St
Gross Annual Income	$22,560
Gross Annual Expenses	-$6,070
NET OPERATING INCOME (NOI)	$16,490

The Net Operating Income (NOI) is the income generated from the property after all the expenses are paid. It’s calculated by subtracting the Gross Annual Expenses from the Gross Annual Income ($22,560 – $6,070 = $16,490).

4. Calculate the CAP Rate

100 Main St
Net Operating Income (NOI)	$16,490
Asking Price	÷ $220,000
CAP RATE	7.49%

The CAP rate is calculated by dividing the NOI by the property’s asking price. In the 100 Main Street example, the CAP rate is 7.49%. ($16,490 NOI ÷ $220,000 Asking Price = 7.5% CAP rate).

What Is a Good CAP Rate for Cash Flow Real Estate?

There isn’t a “good” or “bad” CAP rate because your investor’s target CAP rate entirely depends on their individual goals. A property with a higher CAP rate may have lower long-term appreciation than one with a lower CAP rate. However, unless your investor client is paying cash or putting a lot of money down, it isn’t easy to generate positive cash flow on a property with a CAP rate below 5%.

Calculate the Annual Cash-on-Cash Return

100 Main St
Down Payment	$44,000
Inspections	$450
Closing Costs	$3,900
Rent Ready Costs	$1,500
Other	$0
Total Out-of-Pocket Cash	$49,850
Annual Cash Flow	$6,098
ANNUAL CASH ON CASH RETURN (ROI)	12.23%

The cash-on-cash return or return on investment (ROI) shows what the potential annual return on your client’s cash investment could be. To calculate the ROI, you must include all the costs needed to acquire the property, including the down payment, loan closing costs, and inspection fees.

If there are expenditures needed to get the property rent ready (e.g., carpet, paint, and so on), then you should include those too.

Once you’ve totaled all out-of-pocket expenses, divide the property’s total annual cash flow ($6,098) by the total out-of-pocket expenses to purchase the property ($49,850). This will give you the annual rate of return you’re likely to achieve on investment in the property.

$6,098 Annual Cash Flow ÷ $49,850 Total Out-of-Pocket Cash = 12.23% Annual “Cash-on-Cash” Return or ROI

How to Calculate Monthly Cash Flow

555 Main St
Net Operating Income (NOI)	$16,490
Mortgage Payments (PI)	- $10,392
Annual Cash Flow	$6,098
Divide by 12 Months	÷12
MONTHLY CASH FLOW	$508

Monthly cash flow is the amount of money left over each month after all the expenses, mortgage principal, and interest payments are paid. Start with the NOI and subtract only the annual payment and interest (PI) payments on the mortgage. Next, divide it by 12 months to get the monthly cash flow.

In this example, we assume that the purchaser is financing $176,000 at 4.25% on a 30-year mortgage, with a monthly PI payment of $866. Not too shabby!

($16,490 NOI – $10,392 PI) ÷ 12 Months = $508 Monthly Cash Flow

This is an important step. Many larger multi-unit properties look like an outstanding deal until you factor in the financing. The reason is that some multi-unit buildings may require a commercial loan. Commercial financing typically demands higher down payments and offers higher interest rates than single-family financing.

Other Factors to Consider

CAP rate, cash flow, and ROI are great starting points to help you pinpoint outstanding investment properties for your clients. However, other financial considerations will come into play.

Owning real estate investment properties result in several tax advantages, including interest deductions and the ability to depreciate the building and improvements made to it. On the downside, beware that the IRS can recapture the depreciation and will tax any capital gains when the property is sold. Many investors choose to do a Section 1031 Exchange when they sell their properties.

Use the Financials to Negotiate Your Offer

Use the Rental Multiplier to narrow your search to the six properties with the lowest Rental Multiplier. Next, pick your top three candidates and calculate the CAP rate, Return, and cash flow for each property.

Now you’re well-positioned to recommend the best cash flow investment property for your investor client. Use the financials to guide your client’s offer price. The right price doesn’t always mean a low offer. I’ve paid over the asking price when the financials described here made sense.

The Bottom Line

You attract bees with flowers, and you attract investors with cash flow real estate. Knowing how to find and analyze profitable cash flow investment properties is your first step to attracting investors and building another income stream in your real estate career.

The post How to Analyze Cash Flow Real Estate Investments + Attract Investor Clients appeared first on The Close.

In this article, I’ll teach you to identify six key market stimulants that investors look for when pinpointing the best places to invest. You’ll learn how to choose the right location for your next real estate investment — and provide solid advice to your clients.

6 Local Market Stimulants That Smart Investors Look For

Market stimulants are changes that can cause real estate market growth when added or expanded in a given area. Here are the six market stimulants that savvy investors look for deciding where to invest.

1. An Increase in High-paying Jobs
2. New Transportation Routes
3. Rezoning & Redevelopment
4. New Shopping & Entertainment Options
5. New Schools, Universities & Churches
6. Improved Access to Nature

Let’s take a closer look at each of these stimulants and how they affect real estate markets—making them prime locations for an investment opportunity.

1. An Increase in High-paying Jobs

Employment is the most potent market stimulant that investors use to identify prime investment locations. High-paying jobs attract both hard-working and highly educated people from all around the country and the world. Investment opportunities aren’t limited to large cities with tech jobs, like New York and San Francisco. Increases like these also occur in cities and towns with high-paying blue-collar jobs.

A large company relocating their headquarters, new government contracts, or other business development can all be potent market stimulants that contribute to an increase in high-paying jobs in a city or town near you.

Case Study: Buffalo, New York

Buffalo, New York, is seeing strong property appreciation thanks to an increase in high-paying blue-collar jobs that are attracting job seekers to this northern city. Even though wages in Buffalo are relatively low compared to New York City, for example, the city’s lower cost of housing gives residents more buying power. You can still buy a home in Buffalo for less than $100,000.

As more job seekers move to places with high-paying jobs, you begin to see rents go up. And when rents increase, many residents choose to purchase a home rather than renting. As homeownership increases, fewer and fewer homes become available to purchase, and the market begins to see increased housing prices as demand outstrips supply.

Case Study 2: Hudson, New York

When online retailer Etsy moved their headquarters to the small upstate New York town of Hudson in 2011, they brought high-paying jobs. At Etsy’s Hudson office, annual salaries range from $43,000 to $93,000—higher than the average salary had been.

Even though Etsy only employed a few dozen highly paid workers at their new office, the move encouraged other startups and entrepreneurs to move to the small town of only 7,000 people. As a result, average Hudson home values shot up from $145,000 in 2011 to $250,000 in 2021.

How COVID Has Changed Work

Before the pandemic, it was a safe bet to invest in affordable properties within five miles (about a 20-minute commute time) of major employment centers. Now, up to 45% of employers say they will allow their employees to work from home most–if not all of the time–requiring their employees to come to the office only a few times a week.

This change is already having a significant impact on traditional commuting patterns and non-urban housing prices. Many remote workers who no longer need to commute to the office daily are moving to often more affordable areas with commute times of 45 minutes or more.

This change in how we work creates opportunities for investors looking to purchase properties farther away from major employment centers and invest in outlying suburban and rural areas. Ultimately, investors will now have more options when it comes to real estate investment.

2. New Transportation Routes

New or expanding airports, mass transit, and highways can create great opportunities for real estate investors. New and expanded transportation routes attract new employers and job seekers. New transportation routes can also make once inaccessible areas more appealing to homebuyers since they can commute more easily to work in urban areas.

Case Study: DIA, Denver Colorado

In the 1980s, Denver, Colorado, didn’t top the list of cities attracting high-paying jobs. One of the main factors holding Denver back was the small, outdated Stapleton Airport located in the city center. Surrounded by homes, it had no room for expansion.

In 1995, this problem was addressed with the construction of a new and much larger international airport. Denver International Airport (DIA) was built in an undeveloped area 20 minutes northeast of the city center. While the move was unpopular, city planners understood that they needed to upgrade the airport if Denver was going to compete for high-paying jobs.

The move allowed for more and larger runways, and therefore, larger planes. DIA currently has the longest commercial runway in the world. More importantly, the airport’s surrounding areas were not yet developed, allowing companies to build new facilities and offices nearby.

Since the move in the mid-90s, there has been an explosion of both job growth and housing around Denver International, creating massive opportunities for real estate investors of all types.

Of course, your market doesn’t need a transportation stimulant as large and expensive as a new airport to indicate it’s a good investment opportunity. Look for remote areas with new highways that give commuters easier access to employment centers. New mass transit routes have also been known to increase property values by as much as 40% in less than two years.

3. Rezoning & Redevelopment

Soon, rezoning and redevelopment will be a gold mine for real estate investors. Today, many cities are stuck with both a housing shortage and an aging housing stock that is inefficient and obsolete.

Gone are the days of the small, two-bedroom house on a 7,000-square-foot lot. With more people working from home today, renters and homeowners are demanding modern homes and apartments that are more functional and efficient.

Historically, both a “not in my backyard” stance (often referred to as NIMBY or NIMBYism) and city zoning have prevented developers from removing smaller homes in favor of affordable, high-occupancy housing such as high-rise apartment buildings.

In the past, city governments have also been reluctant to rezone commercial properties to give developers a chance to build new high-occupancy housing because commercial properties yield higher tax rates than residential properties. However, rising residential rents and housing prices are now forcing cities to rethink their antiquated zoning policies.

Case Study: SOHO, New York

Rezoning opens the door for redevelopment. Like many areas throughout the U.S., popular places like SOHO in New York City are facing housing shortages. In the 1990s, the City of New York began the slow process of rezoning commercial properties in SOHO. As the area became more residential, housing prices shot up. Over time, price increases in SOHO began to ripple outward to surrounding neighborhoods.

While most investors aren’t in a position to tear down a factory and build a multi-use high-rise, they can invest in property near an area under redevelopment. Redevelopment to new, high-density housing increases home values in nearby areas because redevelopment often attracts younger, higher-earning workers with more disposable income.

This new workforce needs business services, including restaurants, dry cleaners, and grocery stores. The demand for these services creates job opportunities surrounding the redevelopment. These service jobs attract even more residents, causing an increase in rents and property values.

Population growth and rising property values that result from rezoning and redevelopment make it one of the most impactful market stimulants an investor can use to steer their investment decisions.

4. New Shopping & Entertainment Options

New entertainment options like bars, restaurants, golf courses, and shopping malls are also a local market stimulant that investors seek out. New entertainment options generally follow new high-paying jobs and rezoning, but can have an equally significant impact on housing prices and rents in the surrounding area.

Case Study: Northgate Mall, Durham, North Carolina

In 2014, Duke University studied the impact of the construction of Northgate Mall in Durham, North Carolina. They wanted to see how the mall’s construction affected housing prices and rents in the surrounding areas.

The study found that residential property values in the area directly surrounding the new mall didn’t rise as much as other areas in Durham, likely due to increased traffic, noise, and crime in the immediate area. However, the value of homes just outside that area rose faster than homes that were slightly farther away from the mall.

This study showed that homebuyers are willing to pay more to be close (but not too close) to shopping and entertainment options. So if you want to use new shopping and entertainment market stimulants to identify areas to invest in, you should focus on making a purchase in the surrounding areas.

Of course, more significant economic trends like online shopping can and will change the value of market stimulants. The Northgate Mall is now closed and being redeveloped into a mixed-use space that includes retail, offices, and residences—signaling a market stimulant that is likely to create new opportunities for investors.

5. New Schools, Universities & Churches

New or expanded educational or religious campuses can also be a powerful stimulant to local markets. However, unlike new shopping or entertainment options, the price increases are generally highest in the areas directly surrounding a campus.

Case Study: Duke University

A 2014 study by Duke University showed that property values within one block of the university sold for higher prices than comparable properties that were two blocks away.

The study also found that properties located near the university were largely insulated from the effects of the Great Recession of 2008. While the broader Durham housing market fell during the housing crisis, the properties near the university didn’t depreciate at the same rate.

Of course, you don’t have to wait around for a new university to be built to profit from this market factor. The stimulant effect from new K-12 schools or places of worship can also provide excellent opportunities for investors.

New campuses create new jobs and bring new students and church members into a neighborhood or area. The increase in population helps stabilize rents and supports higher property values—the exact conditions you should be looking for as an investor.

[Related Article: 7 Reasons Why 2022 Is Ripe for Real Estate Investors]

6. Improved Access to Nature

Improved access to local beaches, hiking trails, and other natural recreation areas can also act as a market stimulant. For example, creating a new state park or simply banning new residential or commercial development in a natural recreation area can boost local home values.

Case Study: Apollo Beach, Florida

In the past, home values in Apollo Beach grew much more slowly than in employment hubs like Tampa. Part of the reason for this slower growth was the roads. Apollo residents faced a long, congested commute into Tampa for work. Tampa residents were forced to endure the same long, gridlocked drive to enjoy Apollo’s beaches on the weekend.

A new overpass due for completion in late 2022 will give commuters easier access and Tampa residents a more enjoyable drive to Apollo’s beaches. This new transportation stimulant will create many real estate investment opportunities in both Apollo and Tampa.

Home values in Apollo Beach are likely to see a sharp increase as high net-worth city workers pick up coastal homes that were once too far of a commute. Homes and land between Tampa (the employment center) and the beach will likely increase in value due to new accessibility to both.

Savvy investors pay special attention to employment, rezoning, and transportation changes in areas that have popular environmental features. These small changes can have a giant impact on the real estate market.

Bottom Line

Identifying the right opportunities is crucial when deciding where to invest in real estate. These market stimulants are good indicators that the real estate market in a given area is going in the right direction.

These should help you pinpoint smart investment opportunities. Markets with one stimulant are good and markets with multiple stimulants working in tandem are outstanding.

Over to You

Use these six market stimulants to help you identify real estate investment opportunities. Please share those areas in the comments below. Maybe you’ll get an investor referral!

The post How Smart Investors Find the Best Places to Invest in Real Estate in 2022 appeared first on The Close.